State governments are the canaries in our national coal mine; their tax receipts are one of the very few measures of economic activity that aren’t being systematically fiddled by the federal government. The figures coming out of state revenue offices strike a jarring contrast with the handwaving about “green shoots” and an imminent return to prosperity heard from Washington DC and the media. Across the country, every few months, states that have already cut spending drastically to cope with record declines in tax income find that they have to go back and do it all over again, because their revenue – and by inference, the incomes, purchases, business activity, and other economic phenomena that feed into taxes – has dropped even further. (Source)

Amost No Reserves: Ambac, MBIA Inc. and Assured Guaranty, the three largest insurers of state and local government bonds, have set aside $520 million to pay claims on securities that government budgets can no longer pay. That is four one-hundredths of one percent of the total amount insured. (Source)

“The financial difficulties of local governments in consequence both of the inflation and deflation of real estate values demonstrates strikingly the unwisdom of a revenue s ystem concentrated so heavily upon real estate….” – Herbert D. Simpson, Meeting of the American Economic Association, 1933

Pensions Underfunded. State employee pension systems are facing severe shortfalls, and these growing liabilities threaten to drive many states deeper into the red. This is according to “State Pension Funds Fall Off a Cliff,” a new 50 state study co-authored by Dr. Barry Poulson of the University of Colorado and Dr. Arthur P. Hall of the University of Kansas.

Inconvenient Data: Private companies contribute about 3.5% of total employee compensation to pension/401k plans. Pension contributions from state and local employers vary between 2.9% and 3.8% of total compensation. So much for the “the union pension contracts are killing state budgets” theory. More accurately, states are facing pension shortfalls because they entrusted the funds to Wall Street. We all know how that turns out, time after time. (Source)

“The underfunding of public pension plans has become the 900 pound gorilla in the area of state budgets,” said State Senator Jim Buck of Indiana, Chair of ALEC’s Tax and Fiscal Policy Task Force. “If legislators do not properly address the crisis in public pensions, it will make current budget problems in the states look trivial.” (Source)

The U.S. is facing a pension crisis of unprecedented magnitude. Virtually all pension funds in the United States, both private and public, are massively underfunded. With millions of Baby Boomers getting ready to retire, there is simply no way on earth that all of these obligations can be met. Robert Novy-Marx of the University of Chicago and Joshua D. Rauh of Northwestern’s Kellogg School of Management recently calculated the collective unfunded pension liability for all 50 U.S. states for Forbes magazine. So what was the total? 3.2 trillion dollars. (Source)

Here’s the Plan: States want to dump their pension plans (which they had underfunded and then invested unwisely) and force workers to open 401k plans run by the same folks who ran the state funds into the ground. It’s not about the unions, it’s about Wall Street profits. (Source)

Unemployment Insurance Underfunded. 25 states have borrowed more than $25 billion to keep benefits flowing after their trust funds ran dry. In many other states the situation is deteriorating fast. (Source) See map: Unemployment Insurance Tracker . The Washington Post reports , based on US Dept of Labor analysis, States will need another $90 billion to keep their funds operating by 2011.

California is paying out so much for jobless benefits and collecting so little in payroll taxes that its unemployment insurance fund could be $17.8 billion in debt by the end of 2010, according to a new report from the state Employment Development Department. (Source)

Tax collections nationwide declined by 10.9 percent during the third quarter of 2009, the third consecutive quarter during which tax revenues fell by double-digit percentages–the largest decline in state tax collections at least since 1963. Overall, 48 states saw tax collections fall during the third quarter of 2009, with 22 states experiencing a double-digit percentage decline. (Source)

Healthcare Costs Rising

Choices: The biggest driver of deficit budgets, particularly at the State level, is the cost of health care. The choice seems to be between taxing the rich or letting the poor suffer and die from curable conditions. Governors are forming committees to study the options. The GOP doesn’t want these groups to be called death panels. (Source)

Cities and Counties In Financial Crisis. For example . . .

The city of Vallejo, Calif., located just north of San Francisco, filed for bankruptcy in 2008.

Jefferson County, Ala., is on the brink of what would be the largest government bankruptcy in the history of the U.S.–surpassing the 1994 filing by Southern California’s Orange County. At least 39 states expect a budget shortfall in 2011 with the tab estimated at more than $180 billion. (Source).

Here is what you see in town after town. As you approach the town the first thing you encounter is the vulture circle that surrounds it. This is the circle of Wall Street-owned chains emulating the Wal-Mart model of sucking cash out of the area, and sending it to the wealthy elites who own … almost everything now. Nice stores near highway exits. National chains, all the same…

Next is the circle of home equity extraction, the newer houses with the big first and second Wall Street mortgages. These houses mostly look OK — except the foreclosures with the brown lawns and grass growing in the cracks in the driveway. This area has the car dealers and strip malls that used to sell the nice cars or nice goods that feasted on those “take money out of your house” refinancings or second mortgages. Now they have nail and hair salons or are just “for lease.”

Then you get to the areas of older houses, more of them boarded up than you want to see, boarded up stores on a few of the corners of the larger streets. Lots of the still-occupied houses have bars on the windows.

Then you get to the old, crumbling downtown where there are many empty storefronts, some boarded, a few government buildings here and there.

And somewhere is “the old plant.” One or more closed-up, fenced-off, rusting old factories or mills with broken windows, maybe part of it falling down, where the people used to work, the jobs moved to Mexico or China.

Much of the country is like this now. So many of the older small towns, crumbling, the money sucked out by the Wall Street elite. The factories sold off, closed. The people can’t make a living. (Source)

This may be the most calamitous fiscal year states have known in decades,“ reports Rob Gurwitt in Governing magazine, the 23-year-old bible on state and local governance across the continent.

And the coming fiscal year, experts are predicting, may be almost as grim as the states run out of budget gimmicks, rainy-day funds, and the infusion of federal stimulus money that helped them, finally, to balance their current budgets. The states’ cumulative 2010 and 2011 budget shortfalls may be about $350 billion—a third of a trillion dollars—estimates the Center on Budget and Policy Priorities.

Why such grim news? Sales and personal income tax receipts, which soared in the last decade because of the hot, credit-driven consumer economy, cratered with the recession.

Those pre-recession revenue levels, Governing reports, “will either take an unusually long time to recover or may never do so.“ Indicators of prolonged fiscal migraines run from the ravages of industrial decline in the Great Lakes states to the mortgage crises that have tripped the Sun Belt’s perpetual growth machines.

All states face increasing health care costs for their needy. And then there’s the long-term debt that states have incurred—in bonds they’ve sold, in pensions and post-retirement health benefits, in replacement or maintenance of physical infrastructure that can’t be permanently ignored.

Governing columnist John E. Petersen comes up with a startling $2.4 trillion of “aggregated indebtedness” the states carry. And they’re unlike the federal government, which, with an accumulated debt of about $12 trillion, can at least print money and borrow (up to a point) at will. (Source)